Square Mile Investment Consulting & Research is launching two initiatives to provide advisers with a comprehensive assessment of asset managers' ESG credentials and to assist them in understanding and identifying top-rated sustainable strategies.
The first initiative, ESG Integration, will encompass all asset management companies and funds represented in Square Mile's Academy of Funds and will award all of the asset management groups and funds with an ESG Integration score of between zero and three (with three being the highest), irrespective of whether they have an ESG objective.
In assessing groups' ESG integration, Square Mile will look at firms' policies, resources, monitoring and assessment of ESG factors, risk management, engagement and voting practices.
In terms of funds, Square Mile will monitor if, what and how ESG factors are considered, and the impact they have on the research, portfolio construction and risk management processes.
There are 300 funds in Square Mile's Academy of Funds drawn from 65 groups, all of which have been issued two questionnaires; one regarding the business and one for the rated funds.
The qualitative assessments will use data sourced directly from the companies overlaid with Square Mile's expertise.
Square Mile's commercial director Steve Kenny explained: "The industry struggles with the terms ESG and sustainability, which are used interchangeably. ESG is about risk and governance. It is about how a business interacts with its surroundings and how it is run.
"We have seen some groups score well on ESG Integration, but their funds have little regard to what is being done at a corporate level.
"It doesn't mean they are bad, but they are taking a different approach to securities selection.
"There are some substantive groups who score low on ESG at a corporate level but the managers have a self-developed methodology and take ESG on board.
"The findings will create discussion - which is positive. This is our first step and the process will be iterative.
"We will be challenged as the process is qualitative and we will have to be prepared to stand up to scrutiny. Some organisations do not take the questionnaires as seriously as they should so they may be disappointed in the assessment."
The second, complementary initiative - Responsible Ratings - will be run along the same lines as Square Mile's existing ratings process and will seek to identify the best-in-class funds in three categories: exclusion (excluding companies that have a negative impact on society or the environment); sustainability (encouraging positive change) and impact (investing in companies that have a positive impact on society or the environment).
"We will talk to managers about their financial and non-financial objectives and measure their success through a qualitative assessment," Kenny said.
"These types of funds have different metrics by which they are measured.
"Around 19 or 20 responsible funds will be assessed at launch as we don't want to rush through the assessments and compromise quality, but the number will be higher at year end.
"Every time analysts meet asset managers they will discuss where they are on ESG integration."
Both initiatives will go live on 1 October.